SATISFACTION GUARANTEED OR YOUR MONEY BACK

Monday, July 27, 2009

As Macro Man sits here on a rainy Monday morning, watching his portfolio meander, he is struck by the similarities between trading and sports. To be sure, he's hardly the first to draw that analogy. Finance is littered with ex-jocks and, probably much more so, ex-geeks who live out glories on the electronic playing field that they never experienced on the grass ones of their youth.

And of course, there are the literal crossover types, your John Henrys, your Mark Cubans, your Joe Lewises, who parlayed a successful career in finance into sports ownership. Oh, and then there's Lenny Dykstra.

While most of us at the coal-face of risk taking tend to think of ourselves in terms of athletes (after all, "stars" and "superstars" get paid the kind of money that would even make A-Rod or Cristiano Ronaldo jealous), in reality we're more like managers. You craft a team or a portfolio by filling it with the best trades or ideas that you can, and set it against both the market and other managers.

The best know how to grab a "young" trade just as it is bursting into effectiveness, and how to cash out of a mature one before it falls off a cliff. A well-crafted portfolio, like a good team, will feature a number of different players, each of whom is designed to play a specific role in maximizing the effectiveness of the team.

Of course, not every acquisition is successful, and it's entirely possible to add a "player" who on the face of it should complement the existing "team", but who for some reason doesn't work out. Call it the "Randy Moss to the Raiders" or the "Shevchenko to Chelsea" phenomenon.

As a manger, it is frustrating to acquire a pplayer to perform a specific role and have him not execute or wander out of position. Similarly, it's incredibly irritating as a PM to put on a trade to cover you in the event of a specific outcome, watch that outcome arise, and see the trade not perform.

Sometimes, with a trade as with a player, you welcome "him" into the side and realize almost immediately that he doesn't feel right. What do you do then? Wait and hope he assimiliates, to the possbile detriment of the team? Or do you cut bait immediately, incur whatever transactions cost that entails, and try and acquire someone else to do the same job?

These are the issues that Macro Man is wrestling with at the moment. He introduced a new player into the team in the middle of last week who was intended to be a complementary player to the general thrust of his portfolio. And while this trade started well, performance has tailed off drastically. Suffice to say it's not doing what it said on the tin, and it feels wrong.

So he's in the process of extricating himself as quickly and painlessly as possible. After, when it comes to trading, winning is the only thing (as Vince Lombardi might say) that matters.

Yes, but have gone from deep value mid caps circa end of last year and beginning of this one and busted credit to indices only. Now I wouldn't even lift less liquid futures (Malaysia, Indonesia anyone?). I am vaguely concerned that there are a lot of people with tight stops out there, but that just makes me feel less retarded about laying a deuce on all those out of the money puts because when it goes it should go hard. Aluminum at 82 cents - WTF.

I've said this before here. Just go long everything. Keep your stops tight, but long everything except the USD. It's obviously buying season, and nothing of any fundamental concern is worth any thinking whatsoever, because the markets just don't care.

I'd agree finance is littered with ex-jocks. However, there is nothing "ex" about the geeks in finance. Being a dork from primary school through college is not exonerated by getting a job trading derivatives. You just become a highly compensated dork with a nice car and a girlfriend who is doing the ex jocks on rival firms desk behind your back.

This "debt dogs" article sums up the current situation nicely. This market is like the aging slugger who bats .230 but still hits 25 home runs a season, pretty soon it is going to be .175 and 150 strike outs.

That could be a very, very useful player. Do it in a platoon role of ~250 AB with 35 BB and 20 2B. As a baseball GM I happily shall take .230/.370/.600 in a part-time role any day of the week, and even pay well for it. I will, however, aim for the Branch Rickey trick of trading that player roughly a year before he falls of the cliff.